Managing Political Risks in the Emerging Markets

Many emerging markets present unique business opportunities for many Australian corporations. But they are also some of the most socially and politically unstable countries characterized by high levels of unemployment, corrupt regimes, civil wars, high inflation and many other risks. Most companies can afford to bypass these opportunities and so there is need to manage the risk in order to operate smoothly and profitably in these markets. risk insurance – – is one of the services that offers political risk insurance for many Australian companies.

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Political risks have significant adverse effects for businesspeople. There is the potential to lose large sums of money when operating in these markets especially if companies have to shut down operations as a result of social or political unrest. With good risk management through techniques such as
risk insurance –, companies are able to stay in these markets over the longer term and remain profitable at the same time. But there are plenty of others in which Australian companies can mitigate risk when operating in developing and emerging markets. Here is a look at some of the tools that corporate entities can utilize:

Political Risk Insurance

This is the most obvious risk mitigation tool. In business, it is possible to manage political risk through insurance premiums. This can generally be costly but it gives your business one of the most fail-safe ways of ensuring your business is well protected from political instability.

Control procedures

In order to mitigate political risks, businesses also need to be proactive in avoiding those situations that may exacerbate it. For example, before investing in particular markets, you can use scoring systems that will assess the level of political risk so that you can make a determination on whether the investment is really worth it. Big companies generally employ risk analysts that can help the company in staying abreast of political risks including unrest, legislation, closely contested elections etc. Smaller companies may not have the resources to hire top qualified risk analysts so they generally leave the decisions to the company’s CEO.

Handling risks on ongoing basis

It is not always easy to identify political risk in advance. In this case, companies can handle the risks as they come on an ongoing basis. When entering markets, it is important for the businesses to have proper exit strategies as well as alternatives in case they eventually have to exit markets due to an untenable political situation.

Map out the Macro and Micro Risk Profiles

When entering new markets, companies need to evaluate the risk levels both on the micro and macro scale. While the macro risks will affect the entire economy, the micro risks affect specific industries. It is easy to manage the micro risks than the macro ones by for example taking your investments to a new industry or choosing a new local partner in the country that you are investing in. Macro risks, on the other hand, will leave you with very little options.

Diversify Risks

You can also diversify political risks. Companies can, for example, invest geographically in different geographic areas. It is the same old adage of not putting all your eggs in one basket.

When investing, companies must always take political risks seriously. Risk insurance – – is just one way of skinning the cat. But companies can also incorporate the above proactive steps in order to help them maintain their competitive advantages when they are putting their money in risky investment destinations.

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